As the name suggests, a mid-cap company is in the middle of the pack, between large cap and small cap companies. Mutual funds which diversify investments in between mid and small cap companies are termed as mid and small cap funds. Here is an interesting article written by our Fund Manager “Atul Bhole” on “Case for mid-cap investing” for the Hindu Business Line.

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Monday , February 24, 2014
Case for mid­cap investini (also see in Jpeg)
Publication: The Hindu Business Line , Journalist:ATUL BHOLE, Edition:Pune/Delhi/Hyderabad/Chennai/Ahmedabad/Mumbai/Bangalore/Kolkata , Page No: 7, Location: Middle­Center , Size(sq.cms): 320
Case for mid­cap investinig
ATUL BHOLE
The Nifty and Sensex are close
to their previous highs.
However, the CNX Midcap and
BSE Midcap indices are still
hovering between 21 per cent
and 37 per cent below their
previous highs. These stocks
provide a good investment
opportunity over the next 18­24
months.
Well­run mid­sized companies
have historically delivered phe­
nomenal returns over longer
time periods. Many such firms
are driven by competent and
motivated entrepreneurs. They
d e v e l o p c o s t­efficient
structures, brands and
distribution franchises­growth
while maintaining good return
ratios.
Mid­cap companies typically
trade at a discount to their
large­cap counterparts. When a
g o o d q u a l i t y m i d­sized
company delivers consistent
growth, returns from such a
company can be twof o l d —
through normal earnings­led
gains and re­rating of valuation
multiples.
The figures in the table are
based on market close as on
January 31, 2014. The stocks
a n d r et u r n s a r e f o r o n l y
illustrative purposes and
should not to be construed as
investment advice.
Worth exploring now?
The discount between mid­ and
large­cap stocks is currently rul­
ing at 25­30 per cent, higher
than the historical averages of
15­20 per cent. Many mid­caps
are tradi n g a t 9­11 times the
forward multiple, compared to
the historical averages of 12­13
times. With sentiments improving,
these mid­caps have very good
odds of bouncing back to
historical average valua­
powered by bluebytes
tions and providing superior re­
t u r n s . H o w e v e r , b o t t o m­up
stock picking will be of
importance. Along with
sentiment improvem e n t , o n­
g r o u n d e c o n o m i c r ecovery,
coupled with rates coming
d o w n o v e r t h e n e x t 1 8­24
months, can provide relief to
cert a i n m i d­cap companies.
D u r i n g t h e r u n­u p t o t h e
recovery, today's concerns
s u c h a s e l o n g a t e d w o r king
capital cycle, depressed growth
rates and margins can improve
and provide bigger upsides to
the profitability of mid­cap
companies.
Essentials for investing
The company's business and
the market structure in which it
opera t e s o u g h t t o b e
understood. Good
managements with competence
and integrity are essential.
Bottom­up stock selection is
important even when one is go­
ing by the top­down theme. Be
it consumption, export or infras­
tructure, any mid­cap company
should be judged on a
standalone basis. Investors
should lend a
careful look at parameters such
as margin defence, return ratios,
cash generation and capital
alloc a t i o n d e c i s i o n s o v e r a
period of time.
Mid­caps should be examined
on at least two valuation
parameters ­ P/E or P/B ratio or
EV/EBITDA or DCF valuation.
This exercise will help capture
the risks exhaustively.
Once an investing decision
has been taken, it is about
patiently w a t c h i n g t h e
investment grow for years.
Finally what about risk and
volatility in mid­caps?
If the stock selection is done
properly, the degree of risk
reduces notably. Secondly, if one
has invested for a long period
with conviction, the risk­reward
ratio will improve. One can actually
use market volatility to add up
good quality mid­caps.
Also, spread the risk across a
number of mid­cap companies.
(The writer is Fund Manager of
Tata Mutual Fund)